Big Cable’s Sledgehammer Is Coming Down

Why usage-based billing is a threat to the open internet, and what can be done to stop it

I take no pride in saying that I’ve been talking about it for years. The sledgehammer is not something I welcome, and I would have been happy if my fears about it never materialized. After all, the sledgehammer could cost internet users billions of dollars, enrich monopolists, and defeat the spirit — if not the law — of net neutrality. In a big way, the sledgehammer will also beat down our economic growth. This is one evil sledgehammer.

And it sounds so innocent! Usage-based billing. Kind of like paying for what you use, right? Don’t be fooled. The usage-based billing playbook was developed by the mobile wireless industry, which itself is nothing more than a duopoly (Verizon Wireless and AT&T) with a fringe of a few other firms with similar business models. I’ve been predicting for years that usage-based billing will be used as a sledgehammer by other internet access providers like Comcast. Unfortunately, it looks like I’ve been proven right.

The sledgehammer (as employed by the mobile carriers) is a part of a complex scheme designed to hijack the development of a fast, cheap, competitive, unlimited-capacity data communications systems — like the one our country should have.

It begins by announcing a data cap that’s set high enough to affect only a small percentage of current users who routinely hit it. Justify it by saying you’re only targeting the “hogs” who gobble up everybody else’s bandwidth. Say you’ll charge for data usage that exceeds that cap. Then sit back and wait. Eventually, increased usage by more Americans will bring millions into the fold. And presto: without lifting a finger, dominant players can charge more people more per month — on every side of every transaction, content sources as well as consumers — without expanding their facilities, much less upgrading to the communications capacity we need.

Why did this happen on the mobile wireless side? Because no one stood up and complained early enough in the game. And there’s no real competition to prompt better behavior.

That’s bad enough. But the sledgehammer’s use does not stop there. Now the country’s local cable monopolies feel emboldened to open up the mobile carriers’ playbook and set this scheme in motion. They are brash, unapologetic, and fearless — they are feeling their power. Usage-based billing is the sledgehammer they’ve been patiently weighing in their hands for a long time. Forget that they have lots more bandwidth than the mobile carriers —they will employ the caps not because they need to, but because they can get away with it.

What a great deal — for them. The scheme as a whole allows them to make the use of services that compete with their own businesses feel expensive to consumers. Today, these include streaming TV; tomorrow, the squeeze will come in home security, telemedicine, distance education, or anything else that requires modern-day levels of data capacity. It allows these giants to pick and choose among the providers of new businesses that will be allowed to reach consumers effectively. It allows them to charge differently for uses of their network that feel identical to consumers. And it’s unclear whether the FCC has retained the power to do anything about any of this.

The bottom line is that employing the sledgehammer of usage-based billing allows a cascade of practices that will make a mockery of net neutrality — allowing cable to pick the winners and losers among apps and services in the future. And it’s happening now.

Earlier this month, Comcast announced that it would be launching a $15 per month streaming pay TV service — cleverly named Stream TV — that wouldn’t count against the 300GB data plans (that number is the cap) it had already introduced in several states.

To understand why this matters, it’s important to realize that Comcast has intentionally architected the last-mile connections within its network pipe to allow for two different “lanes.” Traffic is either in one lane or the other. A rough way to describe it would be one lane for digital services that Comcast controls or has a relationship with, and the other for high-speed internet access.

But it’s not that simple. The “cable” lane traffic (let’s call it Lane 1) includes not just traditional pay TV but also a host of data services — which today could be Stream and tomorrow could be telemedicine, business conference services, or anything else. And Lane 1 uses the internet protocol! This means that data packets are routed around independently, both upstream and downstream, and all that efficient internet magic is happening. From the user’s perspective, when he or she interacts with these things it will “feel” just like online, internet services are responding.

Comcast labels Lane 1 as a set of controlled IP services — an internet-age successor to its legacy one-way cable services. Other nicknames for this lane: specialized services, IP cable services, managed services.

The second part of the Comcast pipe (Lane 2) is what the rest of us call high-speed internet access. It provides traditional best-efforts delivery of internet protocol packets back and forth between households and businesses, on the one hand, and network interconnection points at the edges of Comcast’s own network.

Online companies hoping to reach Comcast’s subscribers, like Skype, are only allowed to use Lane 2. And so they put their packets on Comcast’s “eyeball” network in Lane 2. The Comcast/Netflix standoff I described in “Jammed” was over Netflix’s ability to get its packets into Lane 2. And the data caps now in the news (or “data thresholds,” as Comcast calls them) are applied to Lane 2.

Because of this scheme, Comcast believes it can roll out its own services like Stream TV (or its partners’ services) in Lane 1 free of data caps. Meanwhile, everyone offering similar services online — again, in the future these services could be anything from business conference calls to remote eldercare — will be shunted to Lane 2, and therefore subject to the caps. That will make these services less desirable to consumers and potential investors in those services.

The sledgehammer is swinging. Here’s how the data cap cuts in: Right now, somewhere around 8 percent of subscribers are routinely exceeding the Comcast 300GB data cap on Lane 2. In the geographic areas in which Comcast is rolling out its caps, overages will automatically trigger a $10 fee for each additional 50GB of data. (Comcast is kindly holding off for three months on imposing those overage charges.) And people wanting “unlimited” data will be allowed to pay $30-$35 over and above their current internet access data charges. Paraphrased: “Lucky you! We’ll be charging you more for the same thing. But we’ll wait a while before we do that.”

Got that? This is about fairness, not congestion. Americans love the idea of “fairness” — undoubtedly Comcast tested out the term in focus groups. But in this particular context “fairness” makes zero sense. Networks are built to meet peak demands. Comcast has already made this investment. No “power user” is having any effect on anyone else’s download experience within Comcast’s Lane 2 — there’s plenty of capacity. (The Netflix/Comcast fracas last year made this eminently clear: as soon as Netflix paid up, presto, Netflix subscribers weren’t faced with a spinning wheel.) Use more, pay more!

So reject the myth that Comcast is simply trying to cope with limited bandwidth. Even Comcast isn’t pretending that’s the case. This is a business strategy. It has no empirical relationship to the cost of delivering a megabyte or 500GB of data to your home.

What it does have to do with is unconstrained pricing power in an uncompetitive marketplace: charging more people more for services with ever-higher profit margins. All the monopoly providers have to do is be patient. Eventually more and more people who don’t want to pay for a traditional, large pay TV package from their cable operator will try to replace that content with internet streaming: services delivered Over The Top (OTT), as the terminology goes. And Comcast and the other operators will be waiting for them with open arms. Sure, yes, you can watch more OTT “Lane 2” programming. But it will cost you!

The growth rate of data usage is sufficiently slow at the moment that Charter’s promise (in connection with its planned merger with Time Warner Cable and Bright House Cable) not to impose usage-based billing for three years is poetic brilliance. Heck, sure, three years sounds fine.

That’s because the sledgehammer’s true damage won’t be obvious for a little while longer. In about five to seven years, those seemingly abundant data caps will begin to look paltry. That’s what the GAO is predicting: they’re estimating that by 2020, high-speed internet access usage by the top 15 percent of internet users will soar waaaay above the cap:

Which means a whole lot of other slower adopters will be above the cap as well by then. Good timing, Charter!

Things are moving steadily in this direction: A September 2015 study based on very recent data from 43,000 U.S. subscribers shows that OTT video and streaming accounts now for about two-thirds of all residential high-speed internet access traffic. The heavy-user group at the very tippy-top of the list is averaging about 600GB of usage every month — the equivalent of four full-length HD movies a day. (Those are the early adopters of multiple devices and tons of access; from the monopolists’ perspective, they’re the canaries in the coal mine.) But almost every household is using some OTT video in a consistent, habitual way, and the authors of the study believe that “the market penetration of these services is increasing rapidly and now represents a serious competitor with traditional linear TV services.”

Here’s the really interesting finding: People in this study who have cut the cord, who don’t subscribe to pay TV bundles, use about twice as much data as bundled pay TV subscribers. And it’s very clear that this big difference is directly ascribable to cutting the cord. The authors had access to information about particular subscribers’ data use right before and after dropping bundled pay TV services — and they saw large and immediate increases in internet data usage. What all of this implies: As OTT offerings improve, cord cutting will accelerate. Right now, it’s still a marginal activity. (I’m a cord-cutter. My students are cord-nevers. We are marginal in the great scheme of things. Sorry, students.)

So this common-sense stuff is why the local cable monopolies are setting the table with usage pricing: when someone buying just their internet access uses competing OTT services (like, say, a new Netflix, or a TV channel that goes out on its own, or, someday, a competing home security or telemedicine service), the cable monopoly makes no additional money from that customer. And at the same the monopoly is going to be losing many traditional linear pay TV subscribers. So, they reason, in order to smooth things out, in order to keep their margins up and continue making more money, they’ve got to treat competing OTT services differently — they’ve got to make them less attractive than their own services. And they’ve got to accustom all of us to this scheme slowly so we don’t get too upset. (John Oliver, are you paying attention?)

Enter Stream TV. Because it’s not subject to any Comcast data cap but feels to the consumer exactly like an OTT internet experience, it will feel like a “free” substitute to the cord-cutter. Makes total sense! Why add a $10-per-month subscription to some new OTT source of programming if it will mean you’re suddenly paying $30 per month on top of that in data overages? Suddenly the “genuine” competing OTT programming or service feels expensive, unattractive, unhealthy — like some enormous piece of cheesecake that your doctor would not want you to eat.

That’s not all. The heft that Comcast has to negotiate better pricing for programming than anyone else is the company’s secret source of strength. Because it gets bulk discounts from programmers based on the number of subscribers it has, Comcast will pay a third to a half of what any small “genuine” OTT upstart will have to pay. Two ways to squeeze: customers will fear a new OTT service (because of the threat of overage charges) and the service itself will have trouble being viable and attracting investment (because it will have to pay so much for programming). The playing field could not be more tilted Comcast’s way.

See how this works? Total sledgehammer.

You might be thinking, “Why can a local cable monopoly impose data caps to begin with?” I already told you: because it can. In the absence of pressure coming either from competition or oversight, and because it’s pretty tricky to switch from one high-speed internet access provider to another, a local provider can act with impunity — as long as its first steps don’t trigger uproar.

And here’s the really tricky part, in the form of a simple imagined scene:

Comcast:We’re zero-rating our own streaming TV service! And it will feel exactly like OTT video! Plus, you’ll love data caps.Public advocates:That’s so wrong! Bad for competition. Bad for innovation.FCC:Hmm.Comcast to FCC and the public: “Whaddaya want to do about it? This is Lane 1, not Lane 2!”

If you’re still with me (those who bailed must not care about high internet access fees or the country’s failure to upgrade to fiber), you might be saying, “Wait a minute — didn’t the FCC lock in net neutrality by finally regulating internet access services?” Yes, earlier this year, the FCC “reclassified” high-speed internet access as a common carriage service under Title II of the Communications Act. This was big and welcome news. This was the moment the FCC starting acting like a regulator, empowered to unleash human ingenuity, for the the first time in a decade. But the Commission defined the service it was planning to regulate with “open internet rules” as:

“A mass-market retail service by wire or radio that provides the capability to transmit data to and receive data from all or substantially all Internet endpoints…”

And the FCC also said that “IP services that do not travel over broadband internet access service… are not within the scope of the open internet rules.” So you see the problem. Comcast is already saying that Stream TV is not covered by the rules prohibiting discrimination and prioritization: “Stream TV is a cable streaming service delivered over Comcast’s cable system, not the Internet.” It’s totally within Comcast’s power to ensure that people interacting with Stream TV can’t reach “all or substantially all Internet endpoints.”

Now, the Commission did reserve the authority to do something about all this if “a service is, in fact, providing the functional equivalent of broadband Internet access service or is being used to evade the open Internet rules.” And the Commission says it’s “vigilantly” watching for abuses. But, boy, is there a lot of wiggle room in that language for Comcast’s lawyers — as well as in a bunch of statements over the years from various people at the FCC celebrating the innovation-promoting possibilities of usage-based billing. Yes, the sledgehammer has been praised by the Commission in the past.

So what should happen?

Competition, of course. There are so many ways for the local cable monopolies to turn dials in their direction the way things are set up now. They can start charging more for peak-hour usage, so they never have to upgrade their physical facilities. They can start charging more for interconnection of Lane 2 with other networks. They can zero-rate a bazillion other services they provide and bundle them with their own “public internet” offerings. They can charge separately for their proprietary WiFi services nationwide — the new bottled water, the thing we ought to have access to in abundance for free.

They can do all of this because most U.S. households have only a single choice of operator for download speeds greater than 25 Mbps. It’s even worse for speeds over 50 Mbps — there the supply is almost always the local cable monopoly outside areas where FiOS or municipal fiber to the home has been built. The cable monopoly I’ve been talking about for so long has gotten worse: the proportion of residential subscribers receiving download speeds of more than 25 Mbps has grown rapidly over the last 24 months.

If we upgraded to competitive wholesale publicly-overseen fiber optic networks all over the country, we could leave the cable industry and its ongoing destructive shenanigans behind. (Without expensive upgrades, the cable guys can’t provide the upload capacity that fiber can.) Yes, it would be initially expensive to do this. But so was the railroad system. So were the highways.

Now it’s time for the third great network upgrade — one the OECD says will have valuable benefits for society, including fewer hours in cars, more jobs, better healthcare options for seniors, and greater productivity. There is a great deal of patient investor capital out there looking to be deployed — and with a few government guarantees (which are cheap to lay out), that capital could be accessed at attractive many-year rates. The investors would make modest returns until the end of their lives and their children’s lives and we’d all be far better off with a vibrant, competitive private retail market for fiber-optic internet access riding on top of the street-grid-like, publicly overseen wholesale networks across the land.

(Google Fiber is both profitable for the company and usefully disruptive of the current stagnant picture; because it’s not offered on a wholesale basis, however, it won’t by itself drive competition among retail fiber ISPs. And we cannot wait for Google Fiber to cover the country. That’s not the company’s plan.)

It’s time to stand up. And when we stand up, we should have a shared purpose and a goal: get wholesale fiber networks built across the country. Right now.

If we don’t — we’ll deserve the scarcity and the sledgehammers that lie ahead.